I am employed and pay tax and national insurance contributions. However outside of work I have the opportunity to make money in another business where I would be a contractor. What is the appropriate way to declare this second income ?
If you earn extra income above your salary, you’ll need to fill in a Self-Assessment tax return to declare the extra income and you’ll be classed as self-employed. You may also need to pay Class 2 and 4 National Insurance Contributions (NICs) on your new contracting business, but only if your contracting earnings are over around £5k, and after taking into account the NICs you’ve paid on your salary.
You can register online via www.hmrc.gov.uk/selfemployed/register-selfemp.htm#2 The form is an interactive pdf, so you may need to update your pdf reader to fill it out properly. You can also register by phone or on paper.
You’ll pay income tax at your marginal rate on the contracting income, so as if it’s your top slice of income. Filling out the tax return for that will also mean that you can “catch up” on any coding problems that may have left you with an under or over payment on your salary through PAYE.
If you earn less than £5,075 from the contracting you won’t have any extra NICs to pay at all; over that level you may have to pay Class 2 NICs (a flat rate levy of £2.40 a week). Class 4 NICs are paid on profits over £5,715; the rate depends on how much NICs you’ve paid on your salary.
If you need to pay Class 2 NICs, that starts straight away. Class 4 and income tax won’t be due until 31 January after the end of the tax year, along with the tax return – so 31 January 2012 for anything you earn up until 5 April 2011. Don’t forget to keep some cash aside to pay it!
See also: Guide to pre-trading expenditure